As I write this, I am unsure what the Deficit Super Committee will have done by their Thanksgiving deadline to stall the wayward flight of our national debt.  I am sure that that this debate will get far more heated and the solution far more painful the longer it lasts.  We must have a serious discussion over the size and scope of government and how to pay for it.

Economically, the answers are clear.  We must cut spending, raise revenues and adjust social security to the demographic reality. Here’s what we might do:

First, we face an annual deficit that the Federal government cannot sustain.  The economy cannot grow with government spending one out every four dollars of income. The needed cuts will hurt: defense, Medicaid and the like will suffer.  We are also going to have to make difficult decisions on the scope of government.  The Department of Education is a perfect example.  The Federal government has virtually no role in educating our children or young adults.  Yet, the U.S. Department of Education employs some 5,000 employees, with a nearly $70 billion budget in an organization that primarily collects federal tax dollars, filters them through a bureaucracy, and sends it back to states, who then send it to local school districts, who train and hire teachers and teach children.  Fixing this is not a philosophical matter. It is an issue of simply ending the absurd.  

To be clear I am no Libertarian.  I deeply love my government and believe the men and women at the U.S. Department of Education are dedicated public servants.  I would also like to see more spent on public education.  But here’s the rub.  Indiana’s share of the U.S. Department of Education is about $1.4 billion. This translates into more than $1,200 per Hoosier student, or about one out of every four dollars the state spends on education.  I am certain Indiana can spend half the money with twice the impact as can the U.S. Department of Education.

Second, we need to raise tax revenues.  The best way is to expand the economy, but even with growth we should eliminate nearly all industry-specific tax loopholes and subsidies. We must likewise eliminate tax deductions for households on all but a handful of politically necessary items: modest mortgages, some charitable deductions, some education expenses and some retirement savings.  If we do this, we can lower both corporate and personal income tax rates and still collect more taxes. 

Finally, we have to get right with social security and Medicare.  Of course older households (age 50 or more) need to stay in the current scheme.  The rest of us need dramatically restructured retirement.  Payroll taxes should be collected on all income.  Retirement age must be increased and benefits reduced so that social security is not a retirement plan, but a guard against poverty.  The payoff for this sacrifice can be substantially lower payroll tax rates, and the survival of the social security system.

The earlier we face these reforms, the better our options.